WisdomTree Minds on the Markets
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Minds on the Markets
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Minds on the Markets
Archive: October 23, 2023
Turning the Page to a New Fiscal Year
Unfortunately, the U.S. financial markets are currently contending with so many headline issues. As a result, it becomes difficult to discern which factor should be looked at as a key catalyst for developments going forward. While uncertainty is typically not the market’s “friend” by any stretch of the imagination, there is one certainty that is not going away any time soon: the burgeoning U.S. budget deficit.
We’ve opined on this topic in prior issues of our weekly but thought it would be a good idea to bring our readers up to date on where the federal government’s balance sheet currently stands. File this next factoid as U.S. Fiscal Year 101. For those who may not be aware, the Treasury’s debt managers offer their financing needs projection on a calendar quarter basis, but the U.S. fiscal budget does not run that way. The fiscal year officially begins on October 1st and ends on September 30th. So, for those keeping track, we are actually now in fiscal year (FY) 2024.
On Friday, the Treasury Department released its final tally for FY 2023, where the annual budget deficit rose by $320 billion to nearly $1.7 trillion. Outside of the red-ink totals that were COVID-related, this represents the highest deficit on record. To provide some perspective, the federal government’s shortfall reached as high as $3.1 trillion in FY 2020 and $2.8 trillion in FY 2021. With pandemic-related expenditures coming off the books last year, the deficit was cut in half and fell to “only” $1.4 trillion.
So, let’s take a quick look at why the deficit increased a rather noteworthy 23% for FY 2023. First up, total revenues fell by a sizeable $457 billion, or 9.3%. A decline of this magnitude hints at widespread decreases among a number of key revenue categories, and indeed, that was the case. However, it was notable that individual income tax receipts posted the largest decline by far, falling over 17%.
On the expenditure side of the ledger, total outlays also fell, but by a more moderate $137 billion. This overall decline masks the fact that a number of key spending categories were actually higher on an FY vs. FY basis. One line-item that will no doubt catch investors’ attention was the $162 billion increase in the amount of interest payments on Treasury Debt, no doubt a by-product of Fed rate hikes and the recent surge in intermediate to longer-dated UST yields.
We have noted that increasing financing needs from the nation’s debt managers to fund widening budget gaps has been one of the factors driving the UST 10-year yield higher of late. If in fact we are correct about the deficit’s secondary impact on Treasuries, the news doesn’t get any better looking ahead. To be sure, trillion-dollar deficits are now the baseline for the federal government for the foreseeable future.
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